3/19/2009 @ 3:35PM

Citi In Reverse

Beleaguered Citigroup, in a desperate attempt to boost its stock price said Thursday it will increase the number of shares outstanding as it tries to convert expensive preferred equity into low-yielding common and may execute a reverse stock split.

Citi’s stock price has dropped 85.9% in the last 12 months, and has fallen 57.1% so far this year as the bank slowly splits itself up. (See “Citigroup In Pieces.”)
Citigroup
shares were off 21 cents, or 6.8%, to $2.87, Thursday afternoon.

A reverse stock split reduces the number of a company’s shares outstanding, but increases the dollar value of its earnings per share. The market value of the company thus remains the same. Companies often elect to do reverse stock splits to avoid the perception that they have little value and also to qualify for holding by institutional investors who cannot or will not hold low-priced shares. It’s the opposite of a regular stock split, which usually undertaken when a company’s stock price has moved so high that it is hard for smaller investors to buy significant lots.

Citi said it would seek shareholder and government approval for a reverse split, with seven possible exchange ratios, ranging from 1-for-2 to 1-for-30. Were it to choose a 1-for-5 ratio, one of the possibliities, its stock would trade above $14, based on the current value.

Although no other banks have announced plans for reverse stock splits, there are several trading under $10 that could benefit from such a move. Bank of America is at $7.07, Barclays is at $6.60 and General Electric, which has a huge finance arm, is hovering around $10, thanks to a nearly doubling of its stock price in the last two weeks.

Stock splits are not always successful. The most-recent banks to perform the action were W Holding in December, BankAtlantic Bancorp in September and Doral Financial in August 2007. W Holding is the only one whose share price has gone up since its offering, rising 35.5% as of Thursday. BankAtlantic’s stock is down 74.0% and Doral Financial’s is off 82.9%.

As announced late last month, Citi is also seeking to exchange about $27.5 billion in public and private preferred securities as part of its agreement with the Treasury Department, which has pledged to tender up to $25.0 billion of its preferred Citi holdings to the conversions. Depending on what other investors do, that could give U.S. taxpayers a 36.0% stake in Citi.

Citigroup said all private holders of convertible preferred securities, with a total liquidation value of $12.5 billion, have agreed to the swap. The bank will also offer holders of nonconvertible preferred and trust preferred securities to exchange their shares. The conversion price is $3.25 per share. Citigroup said it plans to launch the exchange early in April.

Citigroup has 5.5 billion common shares outstanding and said the exchange could increase that number to between 13 billion and 21 billion, depending on how many investors participate. The dividend payout on the common was slashed to a penny in January as the bank sought to preserve capital. (See “A Penny For Citi Investors” and “Banks Decimate Their Dividends.”)

Citi echoed its late February plan to suspend that dividend on both common and preferred shares as a result of the swap.

Swapping the preferreds will increase Citi’s common equity relative to its assets. The bank said in a filing with the Securities and Exchange Commission that increasing its so-called tangible common equity was the primary purpose of the exchange offer. Citi said its tangible common equity could increase to $81.0 billion as a result of the offers, up from $29.7 billion at the end of last year.